The Slow Recovery
by Fred E. Foldvary, Senior Editor, 23 August 2010
The U.S. economy is recovering very slowly because the federal government has made investment too costly. The tax cuts of the early 2000s will expire in 2011. The federal tax rate on dividend income will jump from 15 percent to 39.6 percent. Add to that a new Medicare tax on dividend income of 3.8 percent.When taxes on corporate profits are also included, the highest federal tax rate on dividend income will rise to 68 percent. When state income taxes, that in some states top at over ten percent, are added, less than a quarter of dividend income is kept by the taxpayer. The average top tax rate among industrialized countries is 44 percent. Enterprises seeking to expand will invest in Brazil, Canada, and China rather than in the US.
On August 9, 2010, there was an article in the Wall Street Journal by Michael P. Fleischer entitled “Why I’m Not Hiring.” He points out that an employee in New Jersey who earns $44,000 after deductions costs the company $74,000. The state and federal governments impose a 33 percent surtax on hiring the employee.
The economic policy of the government has been schizophrenic. On one hand, the government is spending hundreds of billions of dollars to simulate demand. On the other hand, the government imposes greater costs on enterprise, which reduces expansion. It is like giving a person caffeine and sleeping drugs at the same time.
Some economists and financial analysts believe there may be a double dip, another major downturn. However, another plunge down is unlikely, because interest rates have been kept very low. Usually, recessions occur after a rise in both interest rates and land values.
So the economy is not likely to crash again, but neither will there be a strong recovery in the USA. But there is strong growth in the emerging economies. Economic power is moving to Brazil, Chile, China, India, and Indonesia. These countries have been increasing their economic freedom, while the US is going backwards.
The US is experiencing both steeply higher taxes and escalating government debt. European countries are also drowning in debt, and the structural problems are not being solved both in Europe and the US. The response to cuts in government spending in Greece is mass protests. Having been given pensions, holidays, and comfortable wages, people scream when they lose these perks. In the long run, the line of least political resistance is default.
Great empires have fallen from excessive spending and debt. The French royalty went bankrupt after the wars of the 1700s, and could no longer pay their debts. The aristocracy refused to pay rent to the king, and so the king turned to the people, who then turned against the royalty.
The American empire is going down the same route. Taxes are high, and spending even higher, and the federal budget deficit will be over a trillion dollars per year for years to come. Conventional economists have been unable to solve the problem. Supply-side economists say that we should cut taxes, but that increases the deficit, and demand side economists say that we should increase spending even more, which also increases the deficit.
Only the few geoclassical economists advise that we should shift taxes off of labor and capital and onto land values. Most economists understand that this shift would truly stimulate investment and hiring, but since it is politically impossible, they are not interested in the concept. The major media is not even willing to discuss it. So the public is kept ignorant.
The failure to tap the natural source of public revenue -- land rent -- makes government cannibalize the economy by taxing production. Wars and promised benefits such as pensions make spending even greater, so governments borrow. The debt eventually crushes the state and ruins the lenders. Everybody knows this, yet we are traveling that route. This is why people are angry and why there is a tea-party movement. But the majority prefers to sleepwalk.
We are stuck in the political gridlock of mass democracy. The communists had the right political model, but the wrong economic model, and they ruined their political model with the domination of Communist parties. Many thoughtful people recognize and mourn the decline of the American and western European civilizations, but they reject the freedom that would rescue prosperity and liberty. The elections such as the one coming up in November 2010 give us bad choices and no real solutions. We are stuck in quicksand with no ladder.
However, it’s not all bad. Ancient Greece fell, yet Greece is still with us. So this is not the end of the world, but there will be a lot of hardship that could have been prevented.
-- Fred Foldvary
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Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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Also see: China's frothy property market falters in June
Mortgages defaulting, Land sales and prices steady
Why is so much wealth in the hands of the few? |
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